Is 'Not Guilty' the Same as 'Innocent'? Evidence from SEC Financial Fraud Investigations

51 Pages Posted: 19 Jun 2019 Last revised: 7 Nov 2019

See all articles by David H. Solomon

David H. Solomon

Boston College - Carroll School of Management

Eugene F. Soltes

Harvard University - Business School (HBS)

Date Written: June 12, 2019

Abstract

The Securities and Exchange Commission (SEC) routinely investigates firms for financial fraud, but investors only learn about regulators’ concerns if managers voluntarily disclose news of the investigation, or regulators sanction the firm. We investigate the effects of disclosing investigations using confidential records on all investigations, regardless of outcome. Markets exhibit some ability to identify which investigations will eventually lead to sanctions. Nonetheless, even when no charges are ultimately brought, firms that voluntarily disclose an investigation have significant negative returns, underperforming non-sanctioned firms that stayed silent by 12.7% for a year after the investigation begins. Consistent with limited investor attention, disclosing in a more prominent manner is associated with worse returns. CEOs who disclose an investigation are also 14% more likely to experience turnover. Our results are consistent with transparency about bad news being punished, rather than rewarded, by financial and labor markets.

Keywords: Fraud, Disclosure, SEC, Reputation, CEO Turnover

JEL Classification: G14, G34, G38, K22, K42

Suggested Citation

Solomon, David H. and Soltes, Eugene F., Is 'Not Guilty' the Same as 'Innocent'? Evidence from SEC Financial Fraud Investigations (June 12, 2019). Available at SSRN: https://ssrn.com/abstract=3402780 or http://dx.doi.org/10.2139/ssrn.3402780

David H. Solomon (Contact Author)

Boston College - Carroll School of Management ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States

Eugene F. Soltes

Harvard University - Business School (HBS) ( email )

Soldiers Field Road
Morgan 270C
Boston, MA 02163
United States

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